# An Investor Bought 100 Shares of Venus Corporation Common Stock 1 Year Ago

An investor bought 100 shares of Venus Corporation common stock 1 year ago
for \$40 per share. She just sold the shares for \$44 each, and during the year,
she received four quarterly dividend checks for \$40 each. She expects the
price of the Venus shares to fall to about \$38 over the next year. Calculate the
investor’s realized percentage holding period return.

Realized percentage holding period return:

= [(4400 - 4000 + 4(40))/4000] x 100%

= 14%

Since the stock has been sold, next year’s expected price performance is irrelevant.

National Telephone and Telegraph (NTT) Company common stock
currently sells for \$60 per share. NTT is expected to pay a \$4 dividend
during the coming year, and the price of the stock is expected to increase
to \$65 a year from now.

a. Determine the expected (ex-ante) percentage
holding period return on NTT common stock.

Expected percentage holding period return = [(65 - 60 + 4)/60] x 100%

= 15.0%

b. Suppose that 1 year later, NTT’s common stock is selling for \$75 per
share. During the 1-year period, NTT paid a \$4 common stock dividend.
Determine the realized (ex-post) percentage holding period return on
NTT common stock.

Realized percentage holding period return = [(75 - 60 + 4)/60] x 100%

= 31.67%

c. Repeat (b) given that NTT’s common stock is selling for \$58 1 year later.

Realized percentage holding period return = [(58 - 60 + 4)/60] x 100%

= 3.33%

d. Repeat (b) given that NTT’s common stock is selling for \$50 1 year later.

Realized percentage holding period return = [(50 - 60 + 4)/60] x 100%

= -10.0%

Assume it is early 2003 and the following bond quotations appeared in the
Wall Street Journal:
ConocoPhillips (COP) 5.900 Oct 15, 2032 95.972 6.200 90 30 88,510
Amerada Hess (AHC) 7.125 Mar 15, 2033 100.145 7.113 179 30 55,000
a. How much in annual interest payment would an investor in each of these

ConocoPhillips = \$59.00

b. How much would you have to pay to buy one COP bond at the last price
shown?

\$959.72
c. Why do you think the yield-to-maturity on the AHC bond is higher than the
yield to maturity on the COP bond?

Since the maturities are similar, the difference in the yield to maturities is most likely due to differences in default risk between the two bonds.

1. What is the basic purpose of a financial market?

Financial markets are where trading in financial assets take place. Financial markets are generally classified into primary and secondary markets. Primary markets are where new securities or primary claims are issued resulting in cash inflow to the issuer. Secondary markets are markets where already existing financial claims such as stocks and bonds are bought and sold.

1. How do money and capital markets differ?

Money markets deal in short-term securities having maturities of approximately one year or less, whereas capital markets deal in longer-term securities having maturities greater than one year. Examples of money market instruments include Treasury bills, commercial paper and certificates of deposit. Examples of capital market instruments include Treasury bonds, preferred stock, and common stock.

5. How do primary and secondary financial markets differ?

In primary financial markets, new securities from an issuing firm are bought and sold for the first time. Hence, firms actually raise the capital they need in the primary financial markets. In secondary markets, existing securities are offered for resale. The issuing firm does not receive any new funds when securities trade in a secondary market, such as the New York Stock Exchange. Secondary markets provide an important service of making securities liquid, thus the existence of secondary markets lowers the cost of raising funds in the primary markets.

7. Describe the concept of market efficiency. What are the three different levels
of market efficiency?

Securities markets are considered to be efficient if prices instantaneously reflect in an unbiased manner all relevant information about that security. If markets are not efficient, or slow to react to new information, a person could easily attain abnormal profits by trading on the security after the release of the information.

The three levels of market efficiency are the weak-form, semistrong-form, and strong-form efficiency. Markets are considered to be weak form efficient if no investor can consistently earn excess (or abnormal) returns based on an investment strategy using historical stock market information such as past prices, returns, or volume of trading. Markets are considered to be semistrong efficient if no investor can consistently earn excess returns based on an investment strategy using any publicly available information. Publicly available information would include things such as announcements of earnings, dividends, sales, annual report releases, mergers, etc. Strong-form efficiency states that security prices would reflect all information, both public and private. Thus, in a strong-firm efficient capital market, no individual or group should be able to consistently earn abnormal profits, including insiders possessing private information about the economic profits of the firm.